Sharpe Ratio

Hi Olaf,

Firstly for those not familiar with the term the Sharpe Ratio seeks to characterize how well the return of an asset compensates the investor for the risk taken, interestingly the Sharpe ratio’s credibility was boosted further when Professor Sharpe won a Nobel Memorial Prize in Economic Sciences in 1990.

• The Sharpe ratio is calculated by subtracting the risk-free rate of return from the expected rate of return, then dividing the resulting figure by the standard deviation.
• A Sharpe ratio of 1 or better is good, 2 or better is very good, and 3 or better is excellent.

However, our Research Lead Shawn was a Prop. Trader for Goldman Sachs and the main matrix watched was the VAR, or Value at Risk. However, these theories are good but if/when markets are volatile a steady nerve, a plan plus an open-mind can be as important as any statistical calculation.

At MM we are long-term believers in equities. We like to keep our portfolio relatively simple, e.g. our Active Growth Portfolio which has 20 stocks spread across most sectors of the ASX200 to varying degrees:

• We look to add value (alpha) through relatively large/small weightings in different market sectors, decisions that are often macro driven.
• Our stock selection is then largely determined by earnings outlooks and relative valuations.

Over the last 3-years the Active Growth Portfolio is ahead of the market by 4.7% annually.